Russia will not get a second miracle out of this oil slump
Russia seems to experience an oil-triggered economic crisis every decade or so. The 1986 price slump led to the fall of the USSR, US$10 per barrel oil in 1998 derailed the tentative post-Soviet recovery and brought the unknown Vladimir Putin to prominence, while Russia scraped through the short price slump following the 2008-9 recession.
This year, both the oil price and the rouble have beaten Mr Putin to 63 – his birthday is next October, while Brent crude was $60.70 per barrel on Friday and the rouble touched lows of 77 to the dollar on December 16.
It is worth recalling what happened after 1998. The Russian economy rebounded surprisingly quickly. Elected president in 2000, Mr Putin initially followed a prudent and orthodox macroeconomic policy, improved tax collection and accumulated “rainy day” savings. Helped by rising oil prices and lower domestic costs because of the weaker rouble, the oil industry revived and grew strongly up to 2004. Apart from 2008’s economic crisis, production has increased every year since 1999.
It is those higher oil prices that have underpinned Mr Putin’s rule: social benefits and cheap imports for ordinary Russians; freedom for enrichment for a circle of insiders. He has re-nationalised most of the Russian petroleum industry, allowed foreign investment only on stringent and usually unfavourable terms, and employed oil and gas projects as strategic, political tools.
Things may not be so favourable this time. Oil prices could remain relatively low for an extended period. The weaker rouble will help Russian oil producers cut costs and bring the national budget closer to balance – but at the cost of stoking inflation, while sharply higher interest rates choke off economic growth.
As Anders Åslund, an expert on the Russian economy, has observed, Russia has $100 billion of external debt repayments due in both 2015 and 2016, which it can neither refinance – because of sanctions – nor pay off, because of the plunging oil price.
The oil industry will not be able to stage a repeat of the “West Siberian miracle” that followed 1998. It has exhausted the backlog of cheap, under-exploited fields – new reserves are in remote parts of East Siberia, or in Arctic waters or shale, which require sanctioned western technology to develop.
Russia has never been able to devise a system that taxes oil production efficiently while still keeping marginal fields commercial. Rather than squeezing more from the sector, if anything tax rates will have to fall, further stressing the budget.
The recent major gas deal with China, concluded on very good terms for the Chinese, was presented – misleadingly – as a blow against Europe. Such a tendency to politicise energy exports is not profitable and scares customers; China is obviously a major and growing market, but Russia does not want to become Beijing’s resource colony. The conflict in Ukraine needs a face-saving settlement for the Kremlin that lifts sanctions.
This crisis may spur Russia to do what it should have done long ago: tackle the institutionalised corruption that has become the system and improve the security of investments, both to reduce domestic capital flight and attract international investment. The oil industry can still drive growth – as it does today in the United States – but needs to be diverse, efficient and technologically advanced. With its great territory and human resources, Russia does not have to be a one-trick economy.
Moscow has fruitlessly discussed the falling oil price with Riyadh, but will never choose to cut its own production significantly. The Arabian Gulf countries, already on the opposing side over the Syrian civil war, should be wary of retaliation against their energy industries. And Russia’s struggles carry a warning to all petroleum exporters – the memories of the good times are not much comfort when the decade’s oil slump rolls around.
Robin Mills is the head of consulting at Manaar Energy and the author of The Myth of the Oil Crisis
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Published: December 21, 2014 04:00 AM